After plunging last week on a downgrade from FBR Capital, I highlighted that the book value in Invesco had been falling quite rapidly, down some 22% since the end of the first quarter. The drops in book value was caused mainly by a drop in the value of the swaps Invesco holds, and that similar swap related losses had not been seen in Annaly Capital Management (NLY) or in American Capital Agency Corp (AGNC), two of the best names in the space. Given the information, I recommended staying away from Invesco until the firm was once again increasing the book value and the dividend.
Invesco's management has come out on the offensive, trying to stabilize the share price. Tuesday the firm announced that the board had approved a 7 million share stock buyback, in addition to providing an update on their portfolio. The firm said that the REIT's goal had shifted to "book value preservation" and that they had reduced leverage this quarter. They also said that they were experiencing lower yields due to increasing prepayments on Agency RMBS and slower prepayments of non-agency RMBS.
In terms of increasing book value, the buyback makes a ton of sense. With shares of IVR currently trading at $14.87, they would need to advance another 10% to reach the book value of $16.47 given at the end of Q3. By buying back shares at prices below book value, the buyback instantly increases book value per share, since each share is being purchased at a discount to its actual value. The buyback also makes sense since Invesco was able to sell 17 million shares in an offering in June at $20.15, and another 20 million shares in August at $18.37, so buying them now under $15 seems like a pretty good trade.
While the book value of IVR should stabilize, or even increase due to actions taken by management, I don't think Invesco is out of the woods. Reduced leverage and lower asset yields would lead me to believe Invesco will see lower earnings in the fourth quarter, and that will likely lead to lower dividends down the road. However, because IVR has a high yield and is trading below book value, I would hesitate to short the name. Instead I would continue to steer investors towards American Capital Agency or Anally Capital Management, as they are doing a better job preserving book value in these volatile times.
Disclosure: I am long AGNC.